Hidden commissions between China factories and sourcing agents

December 2, 2010

Five years ago, when I was working in Hong Kong, one of my friends (who imports from France) asked me for help. I found a few potential suppliers for her, I arranged some meetings on a Saturday, and I accompanied her in the suppliers’ showrooms.

We didn’t really know how to explain our relationship to the vendors, so I told them I was “their agent here in HK”. I was very surprised when they asked me “what is your commission? We need to know it, for our quotations” (they always did it when my friend was busy look at samples or going to the washroom). And they also seemed surprised when I said “no commission for me, thanks.”

Since then, I understood that it is very, very common in China for sourcing agents to get a hidden commission (unknown by the importer). It is more than common: it is normal!!

I am not referring to Chinese trading companies, who buy and sell. These intermediaries give you an all-included price, and hopefully you don’t need a sourcing agent to communicate with them. What I have in mind is the local person who helps an importer in dealing with the supplier.

And it’s not just with Chinese agents. Foreigners have picked up this habit, too. Thousands of individuals are stationed in China for “managing production” for importers who cannot afford a real buying office. Many of them get paid by the factory, on top of the 3% or 5% or 6,000 RMB per month that are promised by the buyer.

Here are just a couple of examples, to illustrate my point:

Last year in Qingdao, I met with a French importer of garments who had several problems. Why wasn’t his agent (another French national, who “took care of production and did the liaison with the factory”) looking for another supplier? Why were prices rising by 15% year on year? My response: I am 95% sure his agent gets fat commissions and is quite happy with that factory.

Last month I talked with an American buyer of furniture, who was using a Chinese lady “on the side of her current job”. She worked for a previous supplier of this importer, so she knows his requirements well. This lady introduced factories to him, where of course nobody spoke English — hence making her indispensable. The buyer was told by a potential supplier that his “sourcing agent” was asking for 10% of all payments.

That’s why I won’t put my hand in the sourcing game. More and more importers are aware of hidden commissions in China, and I don’t want to be suspected.

I don’t even want to give contacts of “good factories”. There are basically three reasons for this:

We should never use the information gathered when helping a client for the benefit of another client. (Imagine that we bring other buyers who saturate the production capacity: the first client will not be too happy…)

A factory might be reliable when serving one of our clients, but disastrous for a new client (e.g. they subcontract the assembly, or they just don’t care about his orders).

It would also be easy for me to get a 5% or 10% commission from the factory, and the importer might suspect me of that even if it’s not the case.

When necessary, we follow a transparent process from the start, rather than using our past contacts. We call it “supplier qualification”. For example, yesterday we helped a buyer by contacting 30+ candidates. He was just too busy to do it, before his upcoming trip to China.

So we wrote this note at the bottom of every email we sent:

We are helping this buyer for finding suitable factories. We will give all the information to him with our comments, and he will contact you for factory visit / price negotiations.

We will not be an agent for this production. We will not get any commission, from anybody. The buyer paid us for this service, based on the time we spend searching and contacting factories. We will probably not be in contact with you again after you respond to this questionnaire.

At the same time, the buyer has the list of the candidates and their full contact information. He can ask one of them about our communications. We encourage our clients to do this.

Does it make sense? Is there any other way of avoiding suspicions and conflicts of interest, while helping small importers who can’t afford a real buying office?

Comments

I’ve been in sourcing and inspection business for many years – I’ve never asked factories for any commissions (other people might thought my honesty is stupid). I cc every e-mail I communicated with factories to my clients started from the beginning and I normally sourced more than 3 reliable suppliers for them to choose. My client paid me average USD150/man day to inspect their goods. I was exhausted most of the time by the end of the inspection day because I always tried to inspect as many pieces of goods as I can – most of the time is 100% inspected. Other QCs I saw while I was doing inspection at the factories – they all showed up very late, checked the shipping marks, assembled a few pieces goods, write the report then left – I am still wondering how much they get paid for doing less than 1 hour job and how much insurance the Buyers got from them…

May,
If what you write is true, you are in the 10% of honest & transparent people here. Congratulations. As you write “other people might thought my honesty is stupid”, but at least you are building a long-term business.

We are the Suppliers for Indian Railways. We will be much grateful to you if you would be kind enough in providing the details of Manufacturers in China of Railway related products viz Petrol driven Rail Cutting Machine, Drills etc.

i have been importing from china for 20 years, i have not found a good agent yet,
why you will be any deferent? and why i sould trust you?
i dont want to insult you, it is not my aim, please replay
nicholas kriss
trycala@gmail.@gmail:disqus com

Nicholas,
I am not asking anybody to trust me. I am not trying to be an agent. I am just trying to warn importers about bad agents (and it seems like you have had the same experiences as me… hard to find a reliable one).

Hello!
Good to see out there there is a question about Trust or Do not Trust your Sourcing Agent?
By the way you Mr Renaud are a sourcing agent, seem the most honest?
It use to happen, that reliable Sourcing Agent our event sourcing company take commission from the supplier, the last one always over charge the Customer. You can aware the client Mr Renaud. But How much do you charge your customers? based on what reliable grill?for my part I think over charge the customers is getting pay twice for the service, a sourcing agent never ask for 3 or 5% commission it’s a fraud. I have doing this for 8 years all around China, my personal customers data is over 1000 all from different countries.

Who said that you cannot trust your agent… there are thousands of agents in YIWU who call themselves YIWU factory, but there are only a fraction of factories in YIWU. And they
are agents. So do not say that you cannot trust an agent.

i’m italian and i do the same work for other countries; and i can tell you that’s being an agent/interpreter or buyer is not an easy job all the time . So i can tell you that the percentages we can get are all deserved . Sometimes i have to deal with very rude customers(i don’t tell you from where they are…)who bargain and treat me and factory owners like rubbish ; so you can immagine that’s not so easy to intermediate during some negotiations . Furthermore when there is a problem the clients have a specific person who look after them . Once more i pay taxes for the commissions i get from the factories/or companies. Anyway i might say that there are bad agents/buyers and interpreters that ask for too high percentages or that they are not qualified to do this job and they don’t work officially . Anyway i’m looking for expanding my business also for chinese customers who are interested in buying Italian shoes/bags and clothes directly form the factories . So please if you know some agencies or privates customers who deal in this business and could be intersted in it, i would be very glad then – and we might exchange our contacts .

I am not a sourcing agent but I work for a company that help a lot of importers achieve better exchange rates than banks and other thirds parties. We do not charge for any transactions and money is sent the same day anywhere in the world.

most of the time is 100% inspected? that is impossible! it would take too much time , the ship will have left when you finish the work. secondly, it would take the factory much resouces to carry, unpack,repack the cartons. imagine hundreds of cartons! they will throw you out of the window! well, there is such a factory who is willing to do as your request, they have to increase the price to cover the 100% inspection cost,so what your hardwork do is to damage the client’s profit. About the factory side commission, my point is we should not judge it by the method. because all cost would be contained in the final price, if the price is too high, business could not happen, he could get zero,so he have to adjust the commission valume;if the buyer accept the price, the commission is also acceptable. in other words, the sum of two side commission is the cost that the buyer should pay. it is the normal cost, you have to pay it in a way or another way.

For small orders, 100% inspection is often possible (especially before the cartons are sealed). What you write is true for average orders, though.
And thanks for your view on the commissions. I am still uncomfortable about agents who lie to their customers by not disclosing where they get money from, though. If they are paid from both sides, will they defend the buyer? I am not sure about that.

you are totally wrong, I am a person who does not love money in the world, I work as an agent for my American friend for over 9 years. sourcing and checking quality, negotiating price and details etc, I can get extra money easily, but I never get one cent secretly, and I often offer to share cost or loss with him. sometimes factories are not all good, when factories are not cooperative or responsible for their mistakes, I compensate for the loss.

and sometimes this factory is not very good, I find another factory, and another factory’s product is much much cheaper than the original factory’s, and quality is much better, most people will get the price difference from the orders, I tell my friend about the new price.

and all factories export directly to my friend’s company. and my friend know all contact info about our suppliers.
My friend said my face is a credit card.
I know once a thief, he can be regarded as a thief all his life. secretly getting one cent is like being a thief.

I never ever do that.

I also worked as an agent for another friend in Manila, for 10 years, all free work, free service, and I paied 1500$ freight for him, he gave me over 7000 yuan only once, and I refunded the money to our supplier, asked my friend to deduct 1000$ from his payment. only learned trade experience from him. and paied freight for sample to his city. I spent my money to travel, contacted with factories. over the 10 years, I can make a few thousands yuan maybe. only it lays a good foundation for my next job, working for my American friend.

I saw some agents get commission from suppliers, and much commission. It is not good, buyer pay him commission and seller pays him commission too.

I am surprised that anyone would be surprised to hear that agents get a kickback from the factories.
If you are an importer and go through an agent, you are very naive to think that you know everything that goes on. Particularly if you don’t know the language that is being spoken.
Furthermore, you should equally question your own buyers if they always stick to the same agents or start giving different favours to certain agents. Shorter payment terms or bigger upfront payment ? You should get weary!

That’s true. But I have seen many smart people surprised when they found out about kickbacks between “their” agents and the factories.
And I remember I was shocked the first time I heard about it. It was not unconceivable, but not obvious either to an outsider.

I’m surprised that anyone thinks this is wrong, as though it is some type of sin. As agents our goal is to make money.

If I am bringing business to a factory they would otherwise not get, that is a service and I intend to bill them for it. As long as the price my client is getting is what they need, the quality is good and delivery on time and I’m doing my very best for the client, I’m doing my job.

Everyone should know up front what the rules of the game are. If I’m hiding a bloated commission that impacts, quality or price to my client, then I’m unprofessional and lack integrity. To think we do this work for free, is absurd in it’s total naivety. A way to avoid suspicion? Be honest.

I want to import Lead Crystal batteries of 150ah/12v 20 nos.from Suzho city.He has quoted total price CIF Chennai as 4060US $ Please advise whether I have to ask him to quote FOB China.,Which is better?I want to get it checked before packing.who will do this correctly,how much I have to pay .please reply to my mail address.I am very small person and the batteries are to be for my own experimental purpose.
Thanking you,
Yours sincerely,
Gopal Reddy,
mobile.+91 9440242815

I am involved in a situation where there is an “agent” in California that is involved in silk imports to California from China. This agent insists that she does not receive a commission from the Chinese silk exporter and only receives a small fee from the California purchaser of the silk. The agent receives payments from the California purchaser and wires the seller some amount on what seems like very loose terms. I believe that the agent takes a cut of the payments prior to wiring to China. The agent has amassed a fortune.

Is it common for the agent’s commission to built into the sale/invoice price of the silk?

What is the customary commission that a silk importer (China to California) receive?

I am trying to find someone to help better explain this China-California silk importer/commissions paid process to me.

Quality Inspections & Supply Chain Management in China

This blog is written by Renaud Anjoran, an ASQ Certified Quality Engineer who has been involved in Chinese manufacturing since 2005.
Renaud's company performs factory audits/evaluations, product QC inspections, and factory process improvements.